Dive Brief:

• The Consumer Financial Protection Bureau scrutinized the tap-to-pay functionality offered through mobile operating systems created by Apple and Google in a Thursday report. 
• The two tech titans, which dominate the U.S. mobile operating system market, have completely different rules with respect to use of tap-to-pay. Google’s Android OS allows third-party payment apps to use the feature, while Apple’s iOS only allows its own app, Apple Pay, to use it. 
• “Restrictions on the use of tap-to-pay reduce consumer choice and inhibit progress toward a more robust open banking ecosystem,” the CFPB said in a Thursday press release for the report.

Dive Insight:

Tap-to-pay is a payment method in which a consumer hovers their smartphone near a payment terminal. It does not require the customer to use a physical credit or debit card. It is enabled by near-field communication chips built into the smartphone and payment terminal.

That mobile wallet technology has been part of the Google Pay app since 2011 and the Apple Pay app since 2014, according to a report by the U.S. Payments Forum.

The total value of U.S. tap-to-pay transactions grew in the following years, to nearly $300 billion last year, including Samsung Pay, according to the CFPB press release. The report cites Juniper Research analysts as projecting the value of tap-to-pay transactions to jump 150% in the next five years.

“Apple’s proprietary payment app, Apple Pay, is the only option for tap-to-pay payments on iOS devices,” the release noted. “While Google’s Android operating system does not currently restrict third-party payment app access to the NFC chip on Android devices, this policy could change in the future.”

Thursday’s report makes clear that the bureau sees tap-to-pay restrictions as a threat to CFPB Director Rohit Chopra’s vision for moving the U.S. toward open banking, a worldwide trend in which consumers can safely share their financial data across service providers.

The regulations that the companies set with respect to their devices can impact innovation in the market, choices available to consumers and the growth of open, decentralized payments, the release said. “Regulations imposed by Big Tech firms have a big impact on whether consumers and businesses can make payments using third-party apps,” Chopra said in the Thursday release.

Chopra has been working to create “open banking” rules for financial institutions in the U.S. since late last year. The goal would be to allow consumers to seamlessly switch banks or card carriers by allowing them to transfer their account history easily. In the 2022 announcement, Chopra said he believes this will incentivize banks to provide better service and encourage competition in the market.

In June, Chopra reiterated his goal to encourage open banking, saying in a blog post that the CFPB will finalize a rule proposal later this year. The proposal will be open to public comment before being finalized in 2024.

“As the United States continues its bumpy path towards a more open, interoperable, and decentralized banking and payments system that supports the economy, it will require a close examination of how Big Tech’s business practices and private regulations might impede that goal,” he said in remarks delivered at a Philadelphia Federal Reserve fintech conference Thursday. “Given how essential this infrastructure is for our country, we must ensure that payments in the U.S. are fair to consumers, merchants, and nascent competitors of all sizes.”

Apple and Google did not respond to requests for comment on the CFPB report.

Chopra noted that the agency’s payment priorities include ‘buy now, pay later,’ and bank overdraft issues.

“The CFPB is a very domestic-focused agency…but the firms that we are now overseeing – buy now, pay later payments, there's many others — they really are operating across jurisdictions,” he said. “Much of overdraft is simply a timing mismatch. The work of the CFPB staff on thinking through payments and overdraft, I think, has led to major shifts in the market for which we're continuing to see progress.”

Chopra also warned of the risks of some types of bank-fintech partnerships, which have recently caught regulators’ attention.

“You want to see innovation based on true technology and true solving of consumer problems than what I would call the regulatory arbitrage rent-a-bank model,” he said. The latter is “value creation by the lawyers, not the creators.”